Chapter 5 - principal or initial investment 5 What is the...

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Yi Chen 8/19/2011 Chapter 5 1. Briefly describe what is meant by the time value of money. The time value of money is the math of finance whereby interest is earned over time by saving or investing money. 2. Explain the meaning of simple interest. Simple interest is interest earned only on the investment’s principal. 3. Describe the process of compounding and the meaning of compound interest. Compounding is an arithmetic process whereby an initial value increases or grows at a compound interest rate over time to reach a value in the future. Compound interest involves earning interest on interest in addition to interest on the
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Unformatted text preview: principal or initial investment. 5. What is the meaning of discounting? Give an illustration. Discounting is an arithmetic process whereby a future value decreases at a compound interest rate over time to reach a present value. 6. Briefly explain how present values and future values are related. PV = FV / (1 + r) n and are two ways of looking at the same process involving compound interest rates. If we know the future value of an investment, we can find its present value and vice versa....
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